Contractors: How to deal with interest on overdue invoices

by
Scott Brown
| Jul 03, 2014

Accounting

As a contractor (or limited company owner), you might have experienced the frustration and stress of not having your invoices paid on time. Fortunately, the Late Payment of Commercial Debts (Interest) Act gives you the right to claim interest on overdue payments.

The Late Payment of Commercial Debts (Interest) Act 1998 and amendments, gives you, as a contractor, the statutory right to claim interest from clients or agents who don’t pay you on time. Not only do you have the right to charge interest on late payments, but you also have the right to claim “reasonable” recovery costs. Below is all the information you need to ensure you get what’s due to you.

When should you be paid?

Your contract should stipulate clearly what your payment terms are and when your invoice will be paid. This is usually seven days or 30 days after the invoice has been received. If your contract does not state when the invoice/s will be paid, it will default to 30 days after receipt of the invoice. This means that if you send your invoice on the first of the month, you should receive payment by no later than the 30th of the same month.

Note: While some may think this is 30 working days, it is in fact 30 calendar days.

How much interest can you charge?

The interest you can charge is 8%, plus the Bank of England base rate for business-to-business transactions. You can’t claim statutory interest if there’s a different rate of interest within the contract. The current Bank of England base rate is 0.5%, so statutory interest for a recent debt would be 8.5%.

As an example, if your business is owed £1,000, the annual statutory interest would be £85 (1,000 x 0.085 = £85), divided by 365 to get the daily interest or 23p per day that the payment is late.

When you have waited for longer than two or three weeks, send a new invoice (including the interest) and stipulate when it should be paid to avoid further interest being charged.

What about recovery costs?

You may also choose to add “reasonable” recovery costs to your invoice when a customer does not pay you on time – and that’s on top of the existing three-tiered fixed fees and statutory interest.

If you also incur costs chasing down payment, you can claim these too, within reason. For instance, let’s assume you were owed £10,000 and ended up using a recovery agent to get your money and the agent charges 10%. You would add £1,000 on top of the interest amount added.

When can you claim?

You can begin applying statutory interest from the day the invoice goes overdue, but you might want to give them a week or two before sending the invoice with interest added. A larger amount might scare them into action and you certainly do not want to be working out interest and sending out daily invoices.

It is also a good idea to try to maintain good working relationships with your clients. Our advice is to alert your client when the payment is a day or two overdue. If they don’t respond or you still have not received payment, contact them again and ask politely for payment to be made as soon as possible, informing them that interest will be charged on late payment. If you still don’t have any luck, send out a second invoice, with interest added.

If you need assistance with contractor tax and accounting matters, visit 1st Contact Accounting. You can also set up a limited company, for free, within 24 hours.